PERFORMANCE AUDITING IN PAKISTAN

By

Muhammad Akram Khan

Former Deputy Auditor General of Pakistan
makram1000@gmail.com

HISTORICAL DEVELOPMENTS
Performance auditing in Pakistan became known through the efforts of the
Auditor-General. It is still not widely known in the private sector. Although,
performance auditing, per se, started in Pakistan in 1981 yet its genesis can be
traced to much earlier dates in the history of the Auditor-General's Department.
We can notice the seeds of performance auditing in the Audit Code of the
Department which was issued by the British colonial government in 1938. In
those days the concepts of economy, efficiency, and effectiveness which have now
become popular were little known. In fact, we can see that the authors of the
Audit Code in those days were not even quite clear about some of the concepts
they prescribed. From hindsight, we can now understand that they, perhaps,
intended to achieve the same objectives as we now wish to obtain through
performance auditing. Some extracts from the Audit Code of the Department of
the Auditor-General as developed by the colonial British government but only
marginally changed afterwards and in force even at present are as follows:

"45. Implicit in the provisions of the Order cited in

the preceding Article is the condition that the
expenditure should be incurred with due regard
to broad and general principles of financial
propriety. Any cases involving breach of these
principles and thus resulting in improper
expenditure or waste of public money should be
treated by Audit in the same manner as cases of
irregular or unauthorized expenditure." ( Italics
added.)

"82. Cases may arise in which though no audit

objection can be taken to the terms of an order of
delegation, or other financial rule, yet the
Accountant General feels that the order is likely
to impair seriously the efficiency of financial
 control...."

"84. It is an essential function of Audit to bring to

light not only cases of clear irregularity but also
every matter which in its judgement appears to
involve improper expenditure or waste of public
money or stores, even though the accounts
themselves may be in order and no obvious
irregularity occurred... It is of equal importance
that the broad principles of orthodox finance are
borne in mind not only by disbursing officers but
also by sanctioning authorities." (Italics added.)

"85. No precise rules can be laid down for

regulating the course of audit against propriety. Its
object is to support a reasonably high standard of
public financial morality, of sound
administration, and devotion to the financial
interest of the State." (Italics added.)

" 95. An essential part of the duties of Audit in

relation to borrowing is to see that the proceeds of
loans are properly brought to account and
whether they are expended only on objects for
which the loans were originally raised or to which
borrowed moneys may properly be applied in
accordance with sound principles of public
finance."( Italics added.)

These are some of the provisions of the Audit Code which refer to such concepts
as broad and general principles of orthodox finance, public financial morality,
improper expenditure or waste of public money. These concepts have been
refined recently into economy, efficiency and effectiveness. It has now become
possible to apply these concepts objectively and meaningfully.

Government auditors in Pakistan have been auditing the propriety of public

expenditure in a crude manner ever since the Audit Code was implemented. But
in 1977 a significant development took place. In a televised speech the then
Secretary-General-in- Chief and now the President of Pakistan, Mr. Ghulam Ishaq
Khan announced the decison to establish two Performance Evaluation
Commissions to obtain analytical evidence for drawing well-based inferences on
the performance of public enterprises. The first in the form of a Review
Commission to study and analyse the condition of the state industrial enterprises,
and the other as a special Permanent Unit to evaluate, on a continuing basis, the
performance of the public sector commercial enterprises. For the second purpose,

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the Government of Pakistan entrusted the Auditor-General to carry out the
necessary evaluations. Thus a new office known as Performance Evaluation Cell
(PEC) came into being within the Department of the Auditor-General of Pakistan.
This office has been working since 1978.

The Performance Evaluation Cell developed its methodology with the Dutch
Technical Assistance. The Dutch assistance came in the form consultancy and
training provided by a multi-national consulting company Berenschot-Moret-
Bosboom (BMB). The experience of performance evaluation by the Department
of the Auditor-General was well-rewarded when both the executive departments
and the Public accounts Committees of the National and Provincial Assemblies
appreciated the evaluation reports. It gave the Auditor-General satisfaction and
encouragement. He decided to extend the concept of performance evaluation to
government departments and agencies. That is how performance auditing came to
the Department of the Auditor-General.

It was in 1980, that the Auditor-General took the decision to start performance
auditing of government departments. He set up a directorate of performance
auditing known as Performance Audit Wing (PAW) in his office. The role of the
Performance Audit Wing was to develop methodology, train auditors and help
assure quality of audit in the field.

As a first step, the Auditor-General decided to start the performance audit of

development projects. But necessary expertise and trained manpower were not
available. Once again, the Dutch Government offered a helping hand. Technical
assistance, again executed by the BMB, became available in 1981. These were
hard years. Methodology to audit a wide variety of development projects having
unique performance features was not available. The consultants did the yeoman's
effort by developing a series of Performance Audit Guidelines - twelve in number
and an encyclopedic work. Besides, the consultants trained the performance
auditors and also provided some help in conducting performance audit in the
field. The Dutch assistance came to an end in 1986. The Department of the
Auditor-General started on the road to performance auditing with a fair amount
of confidence.

In 1990, the Department felt the need for some more performance audit
guidelines as well as to extend the application of performance auditing to
programmes, which are much more complex than projects. On the request of the
Department, the Dutch assistance became available for the third time. Because of
the experience and successful execution of the previous projects, the BMB is
executing the third project as well. The present project will terminate, if not
extended, by December 1993.

On the actual implementation front the Department had carried out the
performance audit of 176 projects by 1992. It had trained over 300 auditors of

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middle manager level by 1993. By now it has acquired the expertise to train its
own auditors besides offering its courses to other countries. The level of training
being provided by the Performance Audit Wing is sufficiently high.

THE QUESTION OF AUDIT MANDATE

A number of countries revised their audit laws to incorporate performance
auditing as the statutory duty of the Supreme Audit Institutions. Such changes
initiated a debate within the Department of the Auditor-General of Pakistan about
the legitimacy of performance auditing. Some people expressed the apprehension
the Auditor-General's initiative to start performance audit may be questioned by
the executive departments. Feeling the internal pressure, the Department once did
approach the Law Division of the Government of Pakistan to help enact the
performance auditing in the statute itself. But the Law Division advised that such
an amendment in the law was not called for as the term " audit" was broad
enough to cover performance auditing as well.

Let us have a look at the law and its meanings. The Pakistan (Audit and
Accounts) Order, 1973 [President's Order No.21 of 1973] says:

"11. Audit: (1) It shall be the duty of the Auditor-

General to :

(i) audit all expenditure from the revenues of the

Federation and the Provinces and to ascertain
whether moneys shown in the accounts as having
been disbursed were legally available for and
applicable to the service or purpose to which they
have been applied or charged and whether the
expenditure conforms to the authority which
governs it."

This provision and subsequent provisions of the Order authorize the Auditor-
General to carry out the audit of the expenditure and receipts of the Federation
and the Provinces. But the Order does not define the term "audit". For this we
shall have to turn to other authoritative pronouncements. Let us see a sample of
them.

"Audit:In general, the mechanism within the

process of accountability whereby the
performance of those in control of the resources
of an organization is checked or monitored by or

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 on behalf of interested parties."1

"Audit: Review of a body's activities and

operations to ensure that these are being
performed or are functioning in accordance with
objectives, budgets, rules and standards. The aim
of this review is to identify, at regular intervals,
deviations which might require corrective action."2

" Government auditing is the objective,

systematic, professional and independent
examination of financial, administrative and other
operations of a public entity made subsequently to
their execution for the purpose of evaluating and
verifying them, presenting a report containing
explanatory comments on audit findings together
with conclusions and recommendations for future
actions by the responsible officials and, in the case
of the examination of financial statements,
expressing the appropriate professional opinion
regarding the fairness of their presentation."3

"15. a. The term "audit' includes both financial and

performance audits as described in this
statement."4

"Audit serves an accountability relationship. It is

the independent, objective assessment of the
fairness of management's representations on
performance or the assessment of management
systems and practices, against criteria, reported to
a governing body or others with similar

1
Parker, R.H., Macmillan Dictionary of Accounting,, London: Macmillan
Press, 1984, Pp.17.
2
Everard P. & D. Wolter, Selection of Terms and Expressions Used in the
External Audit of the Public Sector, Vienna: European Court of Audit, 1989.
( Circulated during XIIIth INCOSAI at Berlin.)
3
Handbook on Government Auditing in Developing Countries,, New York:
United Nations, 1977, Pp.1.
4
Government Auditing Standards, Washington: GAO, 1988,
Pp.1-4.

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 responsibilities."5

This is a sample of the definitions of audit found in contemporary authoritative

sources. It is obvious from these definitions that the term " audit" is no more
restricted to the audit of financial transactions. It encompasses in its very meaning
examination of the operations, activities, functions, management systems and
performance of the organization under audit. Therefore, the question of the
mandate of the Auditor-General of Pakistan with regard to performance auditing
is only a theoretical discussion. It has been started by some people in the
Department, probably, out of their ignorance about the recent developments in
the concept and practice of auditing. This assertion is further supported by the
fact that the Public Accounts Committees of the Federation and the Provinces
have not only accepted performance audit reports without questioning their
legitimacy, they have also on several occasions asked for more such examinations.

The question of mandate have also never been raised by the auditees. The
auditors have faced numerous difficulties in carrying out performance audit, no
doubt. But they have never been turned back by the auditees on the pretext of
absence of legitimacy.

However, for the satisfaction of those who would still like to see something
specific in support of Auditor-General's mandate for performance auditing we
quote from the decisions of the national Economic Council (NEC), the Supreme
decision-making body on economic matters and headed by the Prime Minister. In
its decision of 4 July 1988, the NEC decided:

"Auditor-General should audit the implementation

and performance of the projects."

This shows that the highest decision-making body in the country has supported
the Auditor-General in carrying out performance audit of projects. However,
there is no doubt that an explicit provision in the law passed by the legislature will
carry greater force and would alleviate whatever apprehensions are there
regarding the authority of the Auditor-General to carry out performance audit.

PERFORMANCE EVALUATION AND PERFORMANCE AUDITING IN

PAKISTAN
In Pakistan, the Department of the Auditor-General started performance
evaluation of public enterprises in 1978. These were the days when the concepts
5
Comprehensive Audit Reporting: Concepts, Issues, Practice," Ottawa:
Canadian Comprehensive Auditing Foundation, 1991, Pp.32.

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of performance auditing, especially the framework of economy, efficiency and
effectiveness was still evolving. The methodology developed by the Dutch
consultants for performance evaluation of public enterprises does not use the
term of "Three Es". Instead, it defines performance evaluation as " a periodic
systematic examination of an organization, conducted to identify its strengths and
weaknesses..." The procedure to carry out examination and the focus of
examination is very much the same as expressed by the concept of Three Es.

In 1981, the Department of the Auditor-General of Pakistan commenced with the

performance audit of development projects. The performance audit methodology
explicitly used the concept of Three Es. The procedure was very much like that of
performance evaluation. But the analytical techniques were quite different. In
performance evaluation of public sector enterprises, the main thrust was on
judging the performance in the light of good management practices while in
performance audit of projects the emphasis was on identifying the economic and
financial rates of return of the projects. But shortly after the introduction of this
methodology, the Department realized that limiting the performance audit of
projects to mere financial and economic rates of return was too restrictive.
Therefore, the Department started expanding the criteria for performance audit as
well. Now the performance audits of the Department use the criteria of generally
accepted management practices as well as economic and financial analysis. Thus
the scope of performance auditing has expanded slightly more than the
performance evaluation of public enterprises.

Another important difference between performance evaluation and performance

audit in Pakistan is that the former accepts the data of the public enterprises as
presented by them. They do not "audit" the data. Most probably, it is so because
the financial audit of most of the public enterprises is carried out either by private
accounting firms or by another office within the Department of the Auditor-
General viz. Directorate of Commercial Audit. The evaluators of Performance
Evaluation Cell, therefore, do not audit the data. They only "analyze it against a
pre-determined criteria.

In the case of performance auditing, the auditors are supposed to "audit" or verify
the data presented by the auditees. Afterwards, they analyze it against a pre-
determined criteria.

It is important to note that the distinction between performance evaluation and

performance auditing as discussed above is purely a local innovation of Pakistan.
In the literature on performance auditing, these terms are used interchangeably.
To a person who is not familiar, with the history and evolution of these terms in
the Department of the Auditor-General of Pakistan, this distinction is quite
confusing. It takes quite some effort, often unsuccessfully, to explain the
difference and reason for using two different terms, to outsiders.

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PROBLEMS AND CONSTRAINTS
Performance auditing in Pakistan is over ten years old now. It still faces several
problems which are restraining its way to
become a going concern. Some of these are as follows:

Weak Democratic Tradition

Perhaps the biggest problem is embedded in the social structure of the Pakistani
society which is highly tolerant of corruption, inefficiency and waste. The
democratic tradition is very weak. Performance auditing came into being in the
Western societies in response to increased demands for accountability of the
public managers. The demand came from the legislatures. The public managers
demurred to respond to this demand. The auditors demonstrated their willingness
to help the legislature in getting more information on public funds and value-for-
money from them. But in a society where democratic traditions are almost non-
existent, such a concept of auditing is surely going to take much longer to take
roots. Despite the enthusiasm of the Department of the Auditor-General it has not
become very popular in the society as a whole.

The Problem of Supply and Demand

The performance auditing is suffering from the problem of excess supply. This
may sound to be an unrealistic statement in view of the fact that the Department
of the Auditor-General is covering less than 1% of the development projects. The
position needs to looked at from the point of view of the users of the
performance audit reports. The auditees have hardly ever asked for any
performance audit. The legislative select committees on Public Accounts have, in
some cases appreciated the performance audit reports. But they do so when the
Department presents it. Their interest in this type of work is merely to the extent
the Department is doing it of its own volition. As a result, the senior managers of
the Department also take it in a lukewarm manner. A more proactive stance of the
legislature would certainly ignite greater interest within the Department and make
the quality of examination better. The Department has not done sufficient
marketing of the concept to the executive departments. Most of the auditee
managements are either unsure of the Department's ability to carry out
performance audit or skeptical of its utility.

The Resource Constraints

Since the Department of the Auditor-General started performance auditing on its
own initiative, it does not have sufficient human and financial resources to carry

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out a high quality examination. For example, it cannot hire consultants for
technical examinations. As a result, the performance audits of the Department are
restricted to issues which are treated as "trivial" by the auditees.

Motivation of Auditors
The performance auditing is a laborious type of work. It requires sustained
application of creative abilities which everybody does not possess. The financial
auditing or accounting work is fairly mechanical as compared to it. But there are
no incentives worth the name for the performance auditors in the Department of
the Auditor-General.

Data Availability
Performance auditing requires the auditee management to generate some types of
data which they are not customarily doing. When the performance auditors
approach the auditees to provide information which is not being generated by
them on a routine basis, they resist such demand and at times feel threatened.
Without a very active support from the Government and the Legislatures the
problem cannot be solved.

Feedback Arrangements
Whatever audit reports have been produced by the Department of the Auditor-
General have not been put to any use by the Government. The evidence is that
the Government departments are committing the same mistakes year after year.
Projects are failing one after the other for same reasons. The Government
departments have not learnt any lessons from their own mistakes pointed out by
performance audit. There is no institutional arrangement which may feedback the
results of performance audit in the planning process of the future projects. This
goal seems to be still far away as there is not even much realization of this
shortcoming.

Management of Performance Audit

There are several problems internal to the Department of the Auditor-General.
They pertain to the area of audit management. For example, the planning process
for performance auditing does not follow any sharp criteria. There is no strategic
vision of the Department regarding performance auditing. The planning decision
are done on the basis of skeleton information, without any risk analysis and the
direction for reporting results. Similarly, the audit execution does not follow
professionally sound procedures for audit programming and work papers. As a
result, audit evidence, sometimes, is not sufficient and competent. There no
elaborate guidelines for allocating time to productive and non-productive

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activities during audit. Consequently, performance audits often take much longer
than originally planned.

CONCLUDING REMARKS

Performance auditing has a great potential in Pakistan. The auditors are

conversant with the concept of auditing against propriety. They only need
knowledge of performance auditing as systematically developed during the last
two decades. The auditing procedures also need refinements. But this is not a
very difficult area. The real challenge before the Department of the Auditor-
General is in selling the idea to the Legislatures and the auditees. Perhaps a much
greater effort is needed in marketing the concept. Similarly, another area of major
thrust is to get the resources and authority to engage consultants for technical
audits. Once the Department is able to generate good quality reports, the time for
institutionalizing the feedback of audit results into the planning process will be
ripe.

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